Markets were in buoyant mood yesterday and overnight, with US equities closing up almost 1%, equity volatility down, Asian equities at a 10-week high and US, Eurozone and UK government bond yields all higher. These moves were helped by decent macro data, including a narrowing of the US trade deficit in April, strong Q1 2018 Australian GDP growth and a further fall in the Swiss unemployment rate and a rise in CPI-inflation.
Ultimately, however, it was hawkish comments from ECB Board member Peter Praet which helped EUR/USD break though 1.18 – its high since 22nd May – and again pushed GBP/EUR below 1.14. Praet confirmed that the ECB would likely discuss at its policy meeting on 14thJune an end to its Quantitative Easing (QE) program due in part to rising Eurozone inflation and inflation expectations.
The consensus forecast is seemingly that the ECB will announce next week that it will gradually reduce its net bond purchases to zero by end-2018, which markets interpret as being positive for the Euro. That may indeed be the case near-term but a tapered end of the QE program will likely result in higher European government bond yields and financing costs for governments, corporates and households, which may in turn weigh on already slowing Eurozone GDP growth.
